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Building a custom home can give you the space, layout, and features you want from the beginning. But unlike buying a finished property, home construction financing involves more moving parts: land, plans, permits, builder contracts, inspections, construction draws, and a long-term mortgage.

That is where a construction loan can help.

A residential construction loan is designed to finance the building of a primary residence or custom home. With the right loan structure and guidance, you can move from planning to groundbreaking to closing with a clear financing plan.

At Coastal Funding Corporation, we help borrowers compare lender options and find mortgage solutions that fit their specific goals. With more than 26 years of mortgage experience and access to a broad network of lenders, we make a complicated process easier to understand.

What is a construction loan?

A construction loan is short-term financing used to pay for eligible costs involved in building a home. Depending on the program, the financing may cover:

• Purchasing a lot
• Site preparation and foundation work
• Materials and labor
• Builder costs
• Required permits and inspections
• Certain closing costs
• Construction-related reserves or contingencies

Unlike a traditional mortgage, the lender usually does not provide the entire loan amount at once. Instead, funds are released in stages called draws as work is completed.

You generally make payments during construction based on the amount already disbursed. Once construction is finished, the loan may convert into a permanent mortgage or be paid off with a separate mortgage.

How does a one-time close construction loan work?

A one-time close construction loan, also called a construction-to-permanent loan, combines the construction financing and long-term mortgage into one closing.

Here is the basic process:

1. You apply and qualify for the total project financing.
2. The lender reviews your income, credit, assets, land, plans, builder, and budget.
3. You close on the loan before construction begins.
4. The lender releases funds through approved construction draws.
5. You make construction-phase payments according to the loan terms.
6. After the home is completed and final requirements are met, the loan converts to a permanent mortgage.

The main advantage is simplicity. You may avoid applying for a second mortgage and paying another round of closing costs after construction.

Some borrowers prefer a two-close structure, where construction financing and the permanent mortgage are separate loans. That approach may provide additional flexibility, but it can also mean another approval process, new closing costs, and greater exposure to changing mortgage rates.

Your best option depends on your finances, project, timeline, and available lender programs.

What do lenders look for when approving a construction loan?

Construction lending involves more than qualifying for a regular mortgage. The lender also needs confidence that the home can be completed within budget and on schedule.

Common requirements include:

Strong, documentable income

Lenders review your income, employment history, assets, debts, and monthly obligations. If you are self-employed or earn 1099 income, traditional documentation may not tell the full story.

Coastal Funding offers alternative income and non-QM loan programs for some borrowers with nontraditional income documentation. Eligibility varies by program and lender.

Credit and debt-to-income review

Your credit history and debt-to-income ratio help the lender evaluate your ability to manage the construction-phase payment and future permanent mortgage payment.

There is no single credit score that guarantees approval. Requirements vary based on the loan type, lender, loan amount, property, and overall application.

A qualified builder

Many lenders require a licensed, insured, and approved general contractor. The lender may review the builder’s experience, references, insurance, contract, and financial qualifications.

Owner-builder projects may be limited or unavailable under many construction programs, so ask about this early.

Complete plans and specifications

Expect to provide detailed architectural plans, construction specifications, a line-item budget, and a signed builder contract.

The more complete your documentation, the easier it is for the lender to evaluate the project and identify potential issues before closing.

A completed-value appraisal

The lender typically orders an appraisal based on the expected value of the home once construction is complete. The appraisal considers the plans, specifications, lot, comparable properties, and finished design.

Cash reserves and contingencies

Construction costs can change. Lenders may require financial reserves and a contingency amount for unexpected expenses.

Your own budget should also include room for potential increases in material costs, landscaping, appliances, design changes, and temporary housing.

How are construction loan funds released?

Construction funds are usually distributed through milestone-based draws. A typical schedule may include:

• Land purchase or initial site work
• Foundation completion
• Framing and roof completion
• Plumbing, electrical, and HVAC rough-ins
• Insulation and drywall
• Interior finishes
• Final inspection and completion

The builder generally submits a draw request after completing a stage of work. The lender may order an inspection before releasing the next portion of funds.

This process protects both you and the lender. Funds are connected to completed work instead of being delivered as one lump sum at the beginning.

Before choosing a loan, ask:

• How many draws are included?
• Who pays inspection fees?
• How long does each draw typically take?
• Is there a retainage or holdback?
• What happens if construction is delayed?
• Are change orders permitted?
• What is the deadline for completing the home?

Clear answers can help you avoid surprises during construction.

What does a construction loan cost in 2026?

Construction loan pricing can differ from standard purchase mortgage pricing. The rate and fees may depend on:

• Credit profile
• Down payment or equity
• Loan amount
• Project complexity
• Builder qualifications
• Construction timeline
• Loan type
• Permanent mortgage terms
• Lender requirements

During construction, some loans use interest-only payments based on the balance drawn. That may help manage cash flow while the home is being built, but your payment can increase after the loan converts to principal-and-interest payments.

When comparing options, do not focus only on the advertised rate. Review the full structure, including:

• Construction-phase interest rate
• Permanent mortgage rate
• Rate-lock period
• Origination or broker fees
• Appraisal and inspection costs
• Closing costs
• Required reserves
• Prepayment terms
• Conversion requirements

Our mortgage programs include a wide variety of residential financing options. We can help you compare the details instead of simply choosing the first construction loan you find online.

Can FHA, VA, or USDA loans be used for new construction?

In some cases, government-backed programs may be available for eligible residential construction projects. Availability depends on the lender and the specific property.

• FHA loans may offer lower down payment requirements and flexible credit guidelines for qualified borrowers. Learn more about FHA loan options.
• VA loans may offer eligible service members, veterans, and surviving spouses benefits such as low or no down payment and no monthly mortgage insurance. Review VA loan options.
• USDA loans may be available for eligible borrowers and properties in qualifying areas. See USDA loan information.

Not every lender offers FHA, VA, or USDA construction-to-permanent financing. Ask specifically whether the program supports new construction, what builder requirements apply, and whether the loan will be one-time close or two-close.

Your step-by-step construction financing plan

Building a home becomes more manageable when you organize the process early.

1. Establish your complete budget

Include the lot, construction contract, permits, utilities, site work, appliances, landscaping, closing costs, and contingency funds.

2. Decide whether you need to purchase land

If you already own the lot, your existing land equity may potentially be considered as part of the project’s overall equity. The lender will determine how it is treated.

3. Choose an experienced builder

Ask whether the builder is licensed, insured, familiar with lender draw procedures, and willing to provide the documentation required for approval.

4. Gather plans and project documents

Prepare your blueprints, specifications, budget, contract, timeline, and lot information before submitting the application.

5. Compare lenders and loan structures

A mortgage broker can compare multiple lender options instead of limiting you to one institution’s construction program.

Searching for a “mortgage broker near me” may help you find local professionals, but availability and expertise matter more than proximity alone. Look for a team that communicates clearly, understands construction financing, and can explain the permanent mortgage terms.

6. Review your long-term payment

Make sure the future mortgage payment fits your budget after construction is complete. If rates or your goals change later, refinancing a home loan may be an option, but it should not be your primary plan for making the project affordable.

7. Stay involved during construction

Keep copies of invoices, inspections, change orders, permits, and draw approvals. Regular communication with your builder and lender can help keep the project moving.

Frequently asked questions

Is a construction loan harder to get than a regular mortgage?

It can involve more documentation because the lender is evaluating both you and the construction project. A complete budget, qualified builder, realistic timeline, and organized financial records can make the process smoother.

Do I need a large down payment?

Not always. Down payment requirements vary by loan type and lender. Conventional construction loans may require more equity, while qualified borrowers may find lower-down-payment options through FHA, VA, USDA, or other programs.

Can a construction loan finance the land?

Some programs allow the loan to include the lot purchase. If you already own the land, available equity may be considered. Ask your mortgage professional how the lender handles your specific situation.

Can I use my current home while building?

Possibly, but the lender will review your existing mortgage, projected construction payment, housing plans, and debt-to-income ratio. Make sure you understand whether you will carry two housing payments during the build.

When should I contact a mortgage broker?

Start before finalizing plans or signing a builder contract. Early guidance can help you understand your likely budget, documentation requirements, down payment options, and lender-approved builder standards.

Ready to explore your home construction financing options?

You do not have to figure out construction lending alone.

At Coastal Funding Corporation, we take the time to understand your project, explain your options, compare lender programs, and keep you informed from application through completion. Whether you are buying a home, purchasing a lot, or planning a custom primary residence, we can help you find a financing path that fits.

Contact our mortgage team for a free consultation, or apply online to get started.

Construction requirements, rates, fees, and program availability vary. This information is for educational purposes only and is not a commitment to lend. Restrictions apply. Equal Housing Lender. NMLS: 103035.